Assignment -
Argonaut has to account for the acquisition of 100% of the shares of Moe's Lawn Care Limited (MLC) in Argonaut's June 30, 20X9, financial statements, even though MLC's numbers might be subject to change after its audit is completed. MLC's temporary bookkeeper, Chris Morgan, has done a great job so far in getting MLC's financial and tax records in better shape; however, there are still some outstanding issues. Following is a status update:
- Chris has successfully reconciled the balances of cash, accounts receivable, prepaid expenses and trade accounts payable, and all of the necessary adjustments relating to these accounts have been reflected in the attached draft financial statements.
- The income tax return for 20X8 was filed and assessed, and all balances owing with respect to that taxation year, including interest and penalties, have been paid.
- Chris has not had a chance to correct the recording of unearned revenue. In addition, the capital lease has not been recorded.
- Chris has not had a chance to estimate the income tax provision for the six months ended June 30, 20X9. You should note that MLC will have a deemed year end for tax purposes for this six-month period (the "stub" period) because of the acquisition of control of its shares by Argonaut.
Required:
1. (MLC Journal Entries and Adjusted Trial Balance) Prepare the journal entries required to correct unearned revenue and record the capital lease. Provide supporting calculations where appropriate.
2. (Stub Period Tax Provision) a. Calculate MLC's income taxes payable and the related tax expense for the six-month period ended June 30, 20X9, using the pre-tax income calculated in Part 1 above.
b. Prepare the related journal entry. MLC uses the taxes payable method to account for income taxes.
3. (MLC Financial Statements) a. Prepare the adjusted trial balance, posting the prepared journal entries.
b. Prepare MLC's balance sheet as at June 30, 20X9.
c. Prepare MLC's income statement and statement of retained earnings for the six-month period ending June 30, 20X9.
4. (Business Combination) The purchase price for the shares will be equal to the amount of retained earnings calculated in Part 3 above. It will be paid to Maureen Tillson in equal amounts on June 30 of each of the next three years. In other words, there will be a vendor note payable.
a. Calculate the fair value of the consideration being paid by Argonaut to acquire 100% of the shares of MLC using MLC's retained earnings from Part 3 above and a discount rate of 7%. To do so, calculate the present value of the vendor note payable.
b. Draft Argonaut's journal entry to record the acquisition of MLC on June 30, 20X9.
c. Prepare Argonaut's balance sheet as at June 30, 20X9, to reflect the acquisition of MLC using the cost method to account for the investment in its shares of MLC, and calculate the relevant balance sheet ratios.
d. Prepare Argonaut's balance sheet as at June 30, 20X9, to reflect the acquisition of MLC using the consolidation method to account for the investment in its shares of MLC, and calculate the relevant balance sheet ratios.
e. Under ASPE, as MLC shares are not actively publicly traded, Argonaut has the option to choose the cost, equity or consolidation methods to report its investment in MLC. Explain the implications of each method and recommend which method should be chosen.
(The "Assignment Support" document attached is the main document to work from. The other attached documents may or may not be helpful to this.)
Attachment:- Assignment Files.rar